Nobody looks forward to filing bankruptcy, but there are times when unmanageable debt becomes too great a burden to bear. Uninsured health care expenses, an unexpected loss of income, unanticipated expenses, rising interest rates, failed business ventures and underperforming investments are just a few reasons people seek relief from debt by filing bankruptcy.
An Option When Chapter 13 is Unavailable
Bankruptcy law provides individual debtors with two choices: a chapter 7 debt liquidation or a chapter 13 debt repayment plan. Some people (especially those with higher than average incomes) are required to file under chapter 13 rather than chapter 7, and other people (including people with mortgages and other secured debts) might find chapter 13 gives them a better chance to avoid foreclosure or repossession. But not everyone is eligible to file under chapter 13. Only individuals with regular income can take advantage of chapter 13, and the Bankruptcy Court will not confirm a chapter 13 plan unless the debtor filing the plan has income available for plan payments after paying his or her monthly expenses. Individuals who don’t have regular income and those who lack the income to make ends meet each month must generally file under chapter 7 rather than chapter 13.
A Good Alternative for People with Few Assets and No Secured Debt
When you file a chapter 7 bankruptcy, the bankruptcy trustee assigned to your case can sell your property and use the proceeds to pay your creditors. State and federal laws create “exemptions” that specify property you can keep. While the exemptions vary from state to state, exempt property generally includes a vehicle of a specified value, a certain amount of cash, your clothing, household goods, and most personal effects. Most people who file bankruptcy find that all of their property is exempt. If you are one of those people, chapter 7 might be your best option for debt relief.
A chapter 7 debt liquidation is also an attractive option for people who do not have secured debt. If you do not have a mortgage, if you do not owe money on a car loan, and if you did not give any lenders a “purchase money security interest” (that is, you did not give them a lien on property that you purchased with the money you borrowed), you can use chapter 7 to wipe out your debt without worrying that a creditor will take your house or car.
A Good Alternative for People Who Have dischargeable debt
Some kinds of debt, including child support and alimony arrearages, most taxes, and student loans cannot be discharged in a bankruptcy. If a large part of your debt is nondischargeable, chapter 13 might be a better option than chapter 7. If you can discharge most or all of your debt, however, a chapter 7 liquidation might be best for you. Even if you have some debts that can’t be discharged, wiping out the majority of your debt with chapter 7 will free up income that you can use to pay your nondischargeable debt.
The Quickest Way to Obtain Relief From Debt
A chapter 13 debt repayment plan takes three to five years to complete. In most cases, a chapter 7 discharge can be granted a few months after you file your bankruptcy petition. For eligible individuals who want to free themselves from debt problems quickly, and for those who do not want to commit themselves to a long-term debt repayment plan, chapter 7 is often the answer.
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Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.